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If you’re in the market for a mortgage, you may be overwhelmed by all the different options — conventional vs. government-backed, fixed vs. adjustable rate, 15-year vs 30-year. Which one is best?

The answer will depend on how much you have to put down on a home, the price of the home you want to buy, your income and credit history, and how long you plan to live in the home. Below, we break down some of the most common types of home mortgages, including how each one works and their pros and cons.

Fixed-Rate vs. Adjustable-Rate Loans

When choosing the best type of mortgage for your needs, it helps to understand the difference between adjustable-rate mortgages and fixed-rate mortgages. Each option has advantages and disadvantages. Here’s a closer look.

	Pros	Cons
Fixed-Rate Mortgage	Your monthly payment is fixed, and therefore predictable.	If rates drop, you have to refinance to get the lower rate.
Adjustable-Rate Mortgage	The initial interest rate is usually lower than a fixed-rate mortgage.	Once the intro period is over, ARM rates adjust, potentially raising your mortgage payment.

Fixed-Rate Mortgage

With a fixed-rate mortgage loan, the interest is exactly that — fixed. No matter what happens to benchmark interest rates or the overall economy, the interest rate will remain the same for the life of the loan. Fixed loans typically come in terms of 15 years or 30 years, though some lenders allow more options.

This type of mortgage can be a good choice if you think rates are going to go up, or if you plan on staying in your home for at least five to seven years and want to avoid any potential for changes to your monthly payments.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If interest rates drop after you take out your loan, you won’t get the lower rate unless you’re able to refinance.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is the most common type of mortgage and the longest term length available for mortgages.

Monthly payments are generally lower than shorter-term mortgages because the loan is stretched out over a longer term. However, the overall amount of interest you’ll pay is typically higher, since you’re paying interest for a longer period of time. Also, interest rates tend to be higher for 30-year home loans than shorter-term mortgages, since the longer term poses more risk to the lender.

15-Year Fixed-Rate Mortgage

A 15-year loan allows you to build equity more quickly and pay less total interest. Loans with shorter terms also tend to come with lower interest rates, since they pose less risk to the lender.

On the flipside, the shorter term means monthly payments may be much higher than a 30-year mortgage. This type of loan can be a good choice for borrowers who can handle an aggressive repayment schedule and want to save on interest.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) has an interest rate that fluctuates according to market conditions.

Many ARMs have a fixed-rate period to start and are expressed in two numbers, such as 7/1, 5/1, or 7/6. A 7/1 ARM loan has a fixed rate for seven years; after that, the fixed rate converts to a variable rate. It stays variable for the remaining life of the loan, adjusting every year in line with an index rate. A 7/6 ARM, on the other hand, means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. A 5/1 ARM has a rate that’s fixed for five years and then adjusts every year.

Many ARMs have rate caps, meaning the rate will never exceed a certain number over the life of the loan. If you consider an ARM, you’ll want to be sure you understand exactly how much your rate can increase and how much you could wind up paying after the introductory period expires.

Pro: The initial interest rate of an ARM is usually lower than the rate on a fixed-rate loan. This can make it a good deal for borrowers who expect to sell the property before the rate adjusts.

Con: Even if the loan starts out with a low rate, subsequent rate increases could make this loan more expensive than a fixed-rate loan.

Recommended: First-Time Home Buyer’s Guide

Conventional vs. Government-Insured Loans

Mortgages can also be broken down into two other categories: conventional loans, which are offered by banks or other private lenders, and government-backed loans, which are guaranteed by a government agency. Here’s a breakdown of conventional vs. government-insured loans, including how each works, and their pros and cons.

Conventional Loan

This is the most common type of home loan. Conventional mortgages must meet standards that allow lenders to resell them to the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is advantageous to lenders (who can make money by selling their loans to GSEs) but means stiffer qualifications for borrowers.

Pro: Down payments can be as low as 3%, though borrowers with down payments under 20% have to pay for private mortgage insurance (PMI).

Con: Conventional loans tend to have stricter requirements for qualification than government-backed loans. You typically need a credit score of at least 620 and a debt-to-income ratio under 36%.

Government-Insured Loan

If you have trouble qualifying for a conventional loan, you may want to look into a government-insured loan. This type of mortgage is insured by a government agency, such as the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA).

FHA Loan

FHA loans are not directly issued from the government but, rather, insured by the FHA. This protects mortgage lenders, since if the borrower becomes unable to repay the loan, the agency has to handle the default. Having that guarantee significantly lowers risk for the lender.

As a result, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. This makes an FHA mortgage a good choice if you have less-than-stellar credit scores or a high debt-to-income (DTI) ratio.

Pro: With a FICO® credit score of 500 to 579, you may be able to put just 10% down on a home; with a score of 580 or higher, you may qualify to put just 3.5% payment.

Con: FHA mortgages require you to purchase FHA mortgage insurance, which is called a mortgage insurance premium (MIP). Depending on the size of your down payment, the insurance lasts for 11 years or the life of the loan.

💡 Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

VA Loan

The U.S. Department of Veterans Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most VA loans require no down payment. However, you’ll need to pay a VA funding fee unless you are exempt. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum in the low to mid 600s.

Pro: You don’t have to put any money down or purchase mortgage insurance.

Con: Only available to veterans, current service members, and eligible spouses.

FHA 203(k)

Got your eye on a fixer-upper? An FHA 203(k) loan allows you to roll the cost of the home as well as the rehab into one loan. Current homeowners can also qualify for an FHA 203(k) loan to refinance their property and fund the costs of an upcoming renovation through a single mortgage.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, too, though some lenders might require a minimum credit score of 500.

With a standard 203(k), typically used for renovations exceeding $35,000, a U.S. Department of Housing and Urban Development (HUD) consultant must be hired to oversee the project. A streamlined 203(k) loan, on the other hand, allows you to fund a less costly renovation with anyone overseeing the project.

Pro: If you have a credit score of 580 or above, you only need to put down 3.5% on an FHA 203(k) loan.

Con: These loans require you to qualify for the value of the property, plus the costs of planned renovations.

USDA Loan

A USDA loan is a type of mortgage designed to help borrowers who meet certain income limits buy homes in rural areas. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pro: There’s no down payment required, and interest rates tend to be low due to the USDA guarantee.

Con: These loans are limited to areas designated as rural, and borrowers who meet certain income requirements.

Conforming vs. Nonconforming Loans

Conventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.

Conforming Loans

Mortgages that conform to the guidelines set by government-backed agencies (such as Fannie Mae and Freddie Mac) are called conforming loans. There are a number of criteria that borrowers must meet to qualify for a conforming loan, including the loan amount.

For 2023, the ceiling for a single-family, conforming home loan is $726,200 in most parts of the U.S. However, there is a higher limit — $1,089,300 — for areas that are considered “high-cost,” a designation based on an area’s median home values.

Typically, conforming loans also require a minimum credit score of 630­ to 650, a DTI ratio no higher than 41%, and a minimum down payment of 3%.

Pro: Conforming loans tend to have lower interest rates and fees than nonconforming loans.

Con: You must meet the qualification criteria, and borrowing amounts may not be sufficient in high-priced areas.

Nonconforming Loans

Nonconforming mortgage loans are loans that don’t meet the requirements for a conforming loan. For example, jumbo loans are nonconforming loans that exceed the maximum loan limit for a conforming loan.

Nonconforming loans aren’t as standardized as conforming loans, so there is more variety of loan types and features to choose from. They also tend to have a faster, more streamlined application process.

Pro: Nonconforming loans are available in higher amounts and can widen your housing options by allowing you to buy in a more expensive area, or a type of home that isn’t eligible for a conforming loan.

Con: These loans tend to have higher interest rates than nonconforming loans.

Reverse Mortgage

A reverse mortgage allows homeowners 62 or older (typically those who have paid off their mortgage) to borrow part of their home equity as income. Unlike a regular mortgage, the homeowner doesn’t make payments to the lender — the lender makes payments to the homeowner. Homeowners who take out a reverse mortgage can still live in their homes. However, the loan must be repaid when the borrower dies, moves out, or sells the home.

Pro: A reverse mortgage can provide additional income during your retirement years and/or help cover the cost of medical expenses or improvements.

Con: If the loan balance exceeds the home’s value at the time of your death or departure from the home, your heirs may need to hand ownership of the home back to the lender.

Jumbo Mortgage

A jumbo loan is a mortgage used to finance a property that is too expensive for a conventional conforming loan. If you need a loan that exceeds the conforming loan limit (typically $726,200), you’ll likely need a jumbo loan.

Jumbo loans are considered riskier for lenders because of their larger amounts and the fact that these loans aren’t guaranteed by any government agency. As a result, qualification criteria tends to be stricter than other types of mortgages. Also, in some cases, rates may be higher.

You can typically find jumbo loans with either a fixed or adjustable rate and with a range of terms.

Pro: Jumbo loans make it possible for buyers to purchase a more expensive property.

Con: You generally need excellent credit to qualify for a jumbo loan.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

Interest-Only Mortgage

With an interest-only mortgage, you only make interest payments for a set period, which may be five or seven years. Your principal stays the same during this time. After that initial period ends, you can end the loan by selling or refinancing, or begin to make monthly payments that cover principal and interest.

Pro: The initial monthly payments are usually lower than other mortgages, which may allow you to afford a pricier home.

Con: You won’t build equity as quickly with this loan, since you’re initially only paying back interest.

Recommended: What’s Mortgage Amortization and How Do You Calculate It?

The Takeaway

There are many different types of mortgages, including fixed-rate, variable rate, conforming, nonconforming, conventional, government-backed, jumbo, and reverse mortgages. It’s a good idea to research and compare different loan programs, consult with lenders, and, if needed, seek advice from a mortgage professional to determine the best type of home loan for your specific circumstances.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the different types of mortgages?

There are several types of mortgages available to homebuyers, each with its own characteristics and requirements. Some of the most common types include:

•  Conventional mortgage This type of mortgage is not insured or guaranteed by a government agency.

•  FHA loan Insured by the Federal Housing Administration (FHA), FHA loans are popular among first-time homebuyers. They offer more lenient credit requirements and allow for a lower down payment (as low as 3.5%).

•  VA loan These loans are available to eligible veterans, active-duty service members, and eligible surviving spouses, and come with favorable rates and terms.

•  USDA Loan Issued by the U.S. Department of Agriculture, these loans are designed for low- and moderate-income homebuyers in rural areas. They offer low interest rates and may require no down payment.

•  Jumbo mortgage A jumbo mortgage is a loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.

•  Fixed-rate mortgage The rate stays the same for the entire life of the mortgage.

•  Adjustable-rate mortgage (ARM) The interest rate is initially fixed for a specific period, then typically adjusts annually based on market conditions.

What are the 4 types of qualified mortgages?

Qualified mortgages are mortgages that meet certain criteria set by the Consumer Financial Protection Bureau (CFPB) to ensure borrowers can afford the loans they obtain. The four main types of qualified mortgages are:

•  General qualified mortgages These mortgages adhere to basic criteria set by the CFPB.

•  Small creditor qualified mortgages These loans have more flexible requirements for small lenders.

•  Balloon payment qualified mortgages These mortgages allow for a balloon payment at the end of the term.

•  Temporary qualified mortgages This type of qualified mortgage provides a transition period for loans that were eligible for purchase or guarantee by Fannie Mae or Freddie Mac but no longer meet those standards.

Which type of home loan is best?

The best type of home loan depends on your financial situation, goals, and preferences.

If you have a significant down payment and strong credit, you might consider a conventional mortgage. If, on the other hand, you have limited funds for a down payment and lower credit scores, you might consider a Federal Housing Administration (FHA) home loan.

VA loans benefit eligible veterans and service members, while USDA loans are for homebuyers in rural areas.

Whether to choose a fixed-rate or adjustable-rate mortgage will depend on your long-term plans and tolerance for risk.

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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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To make homeownership more affordable, the federal government offers programs for first-time homebuyers and buyers with low to moderate incomes. The mortgage credit certificate (MCC) program is one option that helps eligible first-time homebuyers save money on their mortgage.

This guide will unpack how a mortgage credit certificate works, the pros and cons, and claiming it on your taxes.

What Is an MCC?

A mortgage credit certificate, sometimes called a mortgage certificate credit, is designed to help homebuyers recoup a portion of the interest paid on their home mortgage loan. An MCC is a dollar-for-dollar federal tax credit of up to $2,000 on the mortgage interest paid annually. It’s a nonrefundable credit, which just means that the amount of your credit can’t exceed the amount of income tax owed for that filing year.

If you take out a mortgage to buy a home, your monthly payment has four components: principal, interest, taxes, and insurance. State and local housing finance agencies issue MCCs, and if you receive one you can claim the dollar equivalent as a tax deduction to reduce the amount you owe in federal taxes. (Not all states offer MCCs, however. Michigan offers one, for example, while Massachusetts does not.) Eligible homeowners can take advantage of an MCC even if they take the standard deduction rather than itemize deductions. If you are one of the few homeowners who itemizes, any remaining mortgage interest not accounted for in an MCC may qualify for the mortgage interest deduction.

Eligibility for this program is based on income and is generally only available for first-time homebuyers who qualify, though others may be able to buy a home in a “targeted area” designated by the state or Department of Housing and Urban Development and claim a mortgage tax credit.

Keep in mind that different mortgage types may have fixed or variable interest rates. Most fixed-rate loans are eligible for an MCC.

Recommended: First-Time Homebuyer Guide

How Does It Work?

Getting a handle on tax credits and deductions can be confusing as a new homeowner, and that’s OK.

To reiterate, an MCC lets you claim a tax credit for a portion of the mortgage interest paid in a year. This lowers your tax liability, which is the amount you owe to the federal government.

The portion of the mortgage interest you can claim with an MCC, known as the tax credit percentage, depends on the state you live in. Generally, the tax credit percentage ranges from 10% to 50% of a homeowner’s total annual mortgage interest.

The tax credit percentage, the mortgage amount, and interest rate are needed to calculate the total MCC. Note, however, that an annual MCC deduction is capped at $2,000 and can’t exceed a recipient’s total federal income tax liability after factoring in other deductions and credits.

It’s helpful to show how claiming an MCC works in practice. You’ll need to know some mortgage basics, like the interest rate, before getting started.

For instance, a homeowner with a $250,000 mortgage, 3.5% interest rate, and tax credit percentage of 20% could receive a first-year MCC tax credit of $1,750.

Here’s how to break this calculation down by steps:

1.    Determine the mortgage loan balance ($250,000), interest rate (3.5%), and tax credit percentage (20%)

2.    Multiply the loan balance and interest rate to calculate the total interest paid ($250,000 x 0.035 = $8,750)

3.    Multiply the total interest paid by the tax credit percentage to calculate the MCC tax credit ($8,750 x 0.2 = $1,750)

The $1,750 would be applied to your total federal tax bill, rather than deducted from your income. Let’s take a closer look at how claiming an MCC in this example would affect your federal income taxes.

	With an MCC	Without an MCC
Income	$70,000	$70,000
Mortgage Interest Paid	$7,000 (total mortgage interest – MCC tax credit)	$8,750
Taxable Income	$63,000	$61,250
Federal Taxes Owed (22% tax rate)	$13,860	$13,475
MCC Tax Credit	$1,750	0
Total Federal Tax Bill	$12,110	$13,475

In this example, a mortgage credit certificate could lower the amount owed in federal income taxes by $1,365. If you don’t have a mortgage yet, use this mortgage calculator to estimate your interest rate, loan amount, and, on the amortization chart, interest paid.

Mortgage Credit Certificate Pros and Cons

The mortgage credit certificate program was established by the Deficit Reduction Act of 1984 to make homeownership more affordable for low- and moderate-income first-time homebuyers. While an MCC tax credit can provide financial benefits, there are some potential drawbacks to consider, too.

Here’s a side-by-side comparison of MCC pros and cons to help you figure out if an MCC is right for you if you’re a first-time buyer.

Pros	Cons
You can receive up to $2,000 in savings on taxes owed every year you’re paying mortgage interest, and carry over unused portions to following years.	A portion of MCC benefits may be subject to a recapture tax if you move before nine years, have a significant increase in income, or experience a gain from the home sale.
MCCs can reduce the cost of interest and decrease your debt-to-income ratio to help with mortgage preapproval and qualification.	If you have limited tax liability, a MCC tax credit may not pose much benefit since it’s nonrefundable.
MCCs are eligible with most fixed-rate mortgage options, including FHA, VA, USDA, and conventional loans.	Obtaining a MCC may come with processing fees, depending on the lender.
First-time homebuyer requirement is more flexible than other programs and can be waived for active military and veterans or if purchasing a home in targeted areas designated by federal and state government.	The mortgage tax credit cannot be applied to a secondary residence and might not be reissued when refinancing.

How to Get a Mortgage Credit Certificate

Borrowers are issued an MCC through their lender before closing. Thus, it’s important to discuss options early in the process and when shopping for a mortgage.

Eligibility for an MCC varies by location. State housing finance agencies (HFAs) have established requirements for obtaining an MCC, if one is offered. These include limits on household income, loan amount, and home purchase price.

Other criteria to get an MCC include the following:

•   HFA-approved lender: The HFA may require borrowing from an approved list of lenders.

•   First-time homebuyer status: Borrowers must not have owned a principal resident in the past three years.

•   Primary residence: Only owner-occupied homes are eligible for an MCC.

•   Homebuyer education: HFAs may require borrowers to participate in education courses during the purchase process.

Claiming a Mortgage Credit Certificate on Your Taxes

To claim the MCC each year on your taxes, fill out IRS Form 8396. You’ll need to know the amount of interest you paid on the mortgage that year and the tax credit percentage set for the MCC.

Once complete, you’ll also know if any credit can be carried over for the following tax year.

The Takeaway

What is a MCC? A mortgage credit certificate is a federal income tax credit on a portion of the mortgage interest paid annually for low- to moderate-income first-time homebuyers or people purchasing a home in a targeted area.

The home buying process is a serious undertaking, especially for first-time homebuyers. To get up to speed, SoFi’s mortgage help center is a useful place to start and have your mortgage questions answered.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Who gives you the mortgage credit certificate?

A mortgage credit certificate program is administered by state-level housing finance agencies and issued by mortgage brokers or lenders.

Does everyone get a mortgage credit certificate?

No, mortgage credit certificates have borrower income limits and other eligibility requirements. For context, only 10,836 MCCs were issued in 2022, down from 22,298 issued in 2019, likely due to the fact that some states have discontinued their MCC program.

Can I refinance with a mortgage credit certificate?

A mortgage credit certificate does not prevent you from refinancing, but you’ll lose the MCC on your current loan. Many programs, though, allow borrowers to apply to receive a new MCC issued with their refinanced mortgage.

How do I know if I have an MCC?

Borrowers apply for an MCC prior to closing and receive a physical copy with a unique certificate number from their local or state government.

Do I lose my mortgage credit certificate if I refinance?

The original mortgage credit certificate becomes void if you refinance, but you may be able to have the MCC reissued if the principal balance on the refinanced loan is lower than the original.

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Photo credit: iStock/Morsa Images

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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A duplex or townhouse can be a more affordable alternative to a detached single-family home, yet offer a taste of that homeownership. These medium-density housing choices are sandwiched between suburban and high-density development.

When deciding on a duplex vs. townhouse, consider the amount of space you need, the amount of maintenance you want to do, your budget, and whether the rental component of a duplex — or Aunt Jill, Cousin Joe, or Mom next door — appeals to you.

Let’s take a deep dive into the differences between a duplex and townhouse.

What Is a Duplex?

A duplex is a single structure with two conjoined units on one plot of land. Each unit has its own entrance, kitchen, bedrooms and baths. The two units often share the yard, laundry area, and garage space, but that isn’t always the case.

A duplex shouldn’t be confused with a “twin home,” which is two homes that share a wall, but where each unit and the land it sits on is individually owned. The lot line actually runs through the common wall.

Buying a duplex is often touted as a good investment because owners can rent out one side while living in the other.

Types of Duplexes

There are two common configurations when it comes to duplex living:

•   Side by side. The shared wall is in the middle.

•   Up and down. When the units are in an upstairs and downstairs arrangement, the dividing wall is the floor/ceiling.

What Are the Pros and Cons of Duplex Living?

Duplexes are in demand, often by first-time homebuyers.

Owner-occupants have a big financing advantage: If you buy a multifamily property of four or fewer units and plan to live onsite, you can use an FHA loan with a low down payment or a VA loan, if you’re eligible, with no down payment at all.

There are other upsides, and potential downsides, you may want to consider before deciding on a townhouse vs. duplex.

What Is a Townhouse?

You get the idea about duplexes. Now let’s look at what is a townhouse. A townhouse is an individually owned home with two or more stories and at least one shared wall.

You own the inside and outside of your unit and the land it rests on, whereas a condo owner owns the interior of the condo. A townhouse has a separate entrance but may share communal spaces.

Townhouses are often found where land is in short supply. This is particularly true in areas that transition from dense, urban cities to the suburbs. They make good use of the space with their vertical nature and shared walls.

They are typically lower priced than detached single-family homes. By the way, the U.S. Census Bureau, which tracks residential construction, considers townhouses and duplexes single-family homes. Getting a mortgage on a townhouse is similar to obtaining a home mortgage loan for a freestanding house.

Townhome ownership has been rising, and the National Association of Home Builders (NAHB) says the long-term prospects for townhouse construction remain positive as homebuyers seek medium-density residential neighborhoods such as urban villages.

The NAHB reports that townhouses made up almost 15% of new single-family homes in the second quarter of 2024, and the number of new townhouses being constructed has been on the upswing in recent years.

What Are the Pros and Cons of Townhouse Living?

As the prices of traditional single-family homes have gone through the roof in most markets, townhomes have become popular as starter homes.

And downsizers may be attracted to townhouses, whose cost may be lower than their detached counterparts.

Townhouses make great use of space, but they also have less privacy, and you may need to follow the rules of a homeowners association (HOA), if one exists. (In the condo vs. townhouse comparison, condos come with an HOA, but not all townhouse communities do.)

Financing a townhouse works just like financing any single-family home. Here are pros and cons of buying a townhouse compared with a detached single-family home.

Recommended: Home Loan Help Center

Weighing the Differences Between Duplexes and Townhouse

Taking a look at living in a duplex vs. a townhouse side by side, they have commonalities but also differences. Here are some.

Structure and Design

A townhome typically is in a planned unit development where the homes share walls and community spaces. A duplex is structured to share a yard and a wall with only one neighbor.

Purchase Price

Cost will vary based on square footage, neighborhood, amenities, lot size, and other factors. A duplex will usually cost more than buying a townhouse, but the tradeoff is that you can rent out one side.

Maintenance Cost

A townhouse may have HOA dues, though they might not be ample because owners are responsible for much of their own maintenance. A duplex owner will need to maintain both units and the yard. A comparison will depend on the size and age of the properties and more.

Rental Income

If you plan to rent out a townhouse you buy, it’s a single unit. A duplex has two units, so it may be easier to make the financials work.

Privacy

With a townhome, you’ll be living in a community. Compare that with a duplex, where you’re sharing space with one neighbor.

Then again, having a single neighbor might feel less private than if you had many.

Investment Value

The ability to rent at least one side of a duplex holds more investment value than a townhome. The townhome may also have HOA rules about renting that may not jibe with your idea of how to use your property.

The Takeaway

The difference between a townhouse and a duplex is largely about what type of property fits your lifestyle. A duplex can offer a larger yard and rental potential, but a townhouse may bring that single-family home vibe at a lower price point than either a duplex or a detached single-family house.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Are townhomes becoming more popular?

The market share of townhomes is rising. According to the National Association of Home Builders, townhouses composed almost 15% of single-family home starts in Q2 2024 and townhouse starts were at an all-time high in a data series that dates back to 1985.

Which is a better investment: a duplex or a townhouse?

A duplex may be the better investment because you have the potential to rent out both units or live in one and collect rent from the other.

Is it faster to build a duplex or a townhouse?

A lot of factors affect how long it takes to build your new home: size, location, materials, weather, subcontractors, the city or county building department, and the complexity of your building plans. Many townhomes are built at once and may become available more quickly. Construction of a duplex is more like a house.

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Photo credit: iStock/peterspiro

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
This content is provided for informational and educational purposes only and should not be construed as financial advice.

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If you’re buying a home and have a down payment of less than 20%, you may have to pay for private mortgage insurance (PMI) or a mortgage insurance premium (MIP). This insurance does represent an additional charge you must pay for part or all of the life of the loan, but it can unlock homeownership for you.

Private mortgage insurance may be required for conventional home loans, those not backed by the government. Mortgage insurance premium is always a part of FHA-insured loans, at least for a number of years.

Each is intended to protect lenders against losses if borrowers default. Here’s a guide to how they work, how they differ, how much they cost, and when they can possibly be dropped.

What Is Mortgage Insurance Premium?

Borrowers pay MIP if they’re securing a loan backed by the Federal Housing Administration, no matter the down payment amount or loan term.

MIP runs for the loan’s full term or 11 years. There’s a one-time upfront premium of 1.75% of the base loan amount, which can be rolled into the loan, and an annual premium divided by 12 that is part of the monthly mortgage payment.

A key reason people choose FHA loans is the ability to put down as little as 3.5%.

Additionally, if your heart pounds with excitement when you think about buying a fixer-upper and making it beautiful and functional again, FHA offers the FHA 203(k) home loan for that — something that many lenders won’t do, especially if the home isn’t in good enough shape to be lived in.

With an FHA 203(k) loan, a single source of funding, the interest rate may be slightly higher than other mortgage rates, and the loan can require more coordination. It makes sense to choose contractors to rehab the home who are familiar with the program’s requirements.

Recommended: Different Types of Mortgage Loans, Explained

How Much Is MIP on an FHA Loan?

The ongoing annual MIP of 0.45% to 1.05% is divided by 12 and added to your monthly mortgage payment. What you’ll pay depends on your loan-to-value (LTV) ratio (think: down payment) and length of the loan.

Taking out an FHA loan for the common 30 years, or anything greater than 15 years, will result in the following rates for 2023 (measured in basis points, or bps):

Base Loan Amount	LTV	Annual MIP
≤ $726,200	≤ 95%	50 bps (0.50%)
≤ $726,200	> 95%	55 bps (0.55%)
> $726,200	≤ 95%	70 bps (0.70%)
> $726,200	> 75%	75 bps (0.75%)

Here’s an example: Let’s say you borrow less than or equal to $726,200 and have a down payment of 5% or less. You’ll pay an annual MIP of 0.50%. On a home loan of $300,000, that’s $1,500 per year, or $125 per month. (0.0050 x 300,000 = 1,500, divided by 12.)

Some homeowners can pay off their loans quicker so they choose a shorter term, such as 15 years. As a result, they can take advantage of lower MIP, like this:

Base Loan Amount	LTV	Annual MIP
≤ $726,200	≤ 90%	15 bps (0.15%)
≤ $726,200	> 95%	40 bps (0.40%)
> $726,200	≤ 78%	15 bps (0.15%)
> $726,200	78.01% – 90%	40 bps (0.40%)
> $726,200	> 90%	65 bps (0.65%)

So if you were to borrow less than or equal to $625,500 and put down 10% or less, you’d pay an annual MIP of 0.15%. On a $300,000 home loan, that’s $450 a year, or $37.50 a month.

💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

Can You Get Rid of MIP?

Maybe.

If you took out an FHA loan before June 3, 2013, you may be able to cancel MIP if you have 22% equity in your home and have made all payments on time. (FHA lenders do not automatically cancel your MIP once you reach that home equity threshold. You’ll need to ask.)

If you purchased or refinanced a home with an FHA loan on or after June 3, 2013, and your down payment was less than 10%, MIP will last for the entire loan term.

If you put down 10% or more, you’ll pay MIP for 11 years.

Here’s a chart that sums it up. For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP as follows:

Term	LTV	Previous	New
≤ 15 years	≤ 78%	No Annual MIP	11 Years
≤ 15 years	78.01% to 90%	Canceled at 78% LTV	11 Years
≤ 15 years	> 90%	Loan Term	Loan Term
> 15 years	≤ 78%	5 Years	11 Years
> 15 years	78.01% to 90%	Canceled at 78% LTV and 5 Years	11 Years
> 15 years	> 90%	Canceled at 78% LTV and 5 Years	Loan Term

One way to get rid of MIP is to refinance the FHA loan into a conventional loan with a private lender. Many FHA homeowners have enough equity to refi into a conventional loan and give mortgage insurance the heave-ho.

What Is Private Mortgage Insurance?

PMI is typically required when you’re putting less than 20% down on a conventional conforming loan. Most conventional mortgages are “conforming,” which means they meet the requirements to be sold to Fannie Mae or Freddie Mac.

One kind of nonconforming loan, the jumbo loan, which starts at over half a million for a single-family home, does not always require PMI.

Usually, homeowners choose to pay PMI monthly, rather than annually, and it is included in monthly mortgage payments. A few may opt for lender-paid mortgage insurance, but for that convenience a homebuyer will usually pay a slightly higher interest rate.

Although PMI adds costs, it can allow you to qualify for a loan that you otherwise might not. And it can help you to buy a house without putting 20% down.

How Much Does PMI Cost?

PMI varies but often is 0.5% to 2% of the total loan amount annually. The premium amount depends on the type of mortgage you get, LTV, your credit score, and more. It also depends on the amount of PMI that your loan program or lender requires.

According to an Urban Institute report, PMI may be more economical than FHA loans for borrowers with a FICO score of 720 or above and who put 3.5% down.

When Can You Stop Paying PMI?

Buying a home may require you to pay a PMI premium, but there are four methods available to stop paying it.

First, there is a legal end to PMI. Under the Homeowners Protection Act, also known as the PMI Cancellation Act, your lender is required to cancel PMI automatically once your mortgage balance is at 78% of the home’s original value. “Original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced). Which figure is used for the original value can vary by state.

Second, you can reappraise your home, which will likely result in a new value. Thus, you can ask your servicer to cancel PMI based on your built equity and the current value. Owners of homes that appreciated, either over time or thanks to home improvements, may benefit from this. You may need to be proactive with your lender and meet specific eligibility requirements to help make that happen.

Third, you may be able to refinance your mortgage. If you have at least 20% equity, you can possibly qualify for a conventional loan without the need for PMI.

Finally, the Consumer Financial Protection Bureau notes another way in which PMI can be canceled: If you’re current on your payments and you’ve reached the halfway point of the loan’s schedule, even if your mortgage balance hasn’t yet reached 78% of the home’s original value.

💡 Quick Tip: A major home purchase may mean a jumbo loan, but it doesn’t have to mean a jumbo down payment. Apply for a jumbo mortgage with SoFi, and you could put as little as 10% down.

What About Refinancing?

If you have a mortgage that includes PMI or MIP and your property value has increased significantly, one option to consider is refinancing.

Some borrowers may find that they are now able to qualify for a conventional home loan without mortgage insurance.

Refinancing holds appeal because of the possibility of locking in a better rate and reducing your monthly payment. Equity-rich homeowners sometimes like a cash-out refinance.

But as with your original mortgage, you’ll face closing costs if you refinance.

What about a “no cost refinance” you might see advertised? You’ll either add the closing costs to the principal or get an increased interest rate.

The Takeaway

Glass half-full: Private mortgage insurance and mortgage insurance premium open the door to homeownership to many who otherwise could not buy a property. Glass half-empty: PMI and MIP can really add up.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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A mortgage commitment letter is a step beyond prequalification and preapproval and could give a homebuyer an edge in a competitive market. It lays out the loan details and indicates that a buyer has an agreement for a mortgage.

But who should obtain a mortgage commitment letter and when? Let’s take a look at those answers and more.

What Is a Mortgage Commitment Letter?

A mortgage commitment letter — conditional or final — is a step closer to finalizing a mortgage but short of “cleared to close.” The letter signals to the seller that the buyer and a chosen financial institution have forged an agreement.

Buyers may seek a conditional mortgage commitment letter when they’re house hunting, and a final commitment letter when they’re ready to make an offer on a specific home.

In both types of loan commitments, the lender outlines the terms of the mortgage.

Recommended: Buying in a Seller’s Market With a Low Down Payment

Types of Mortgage Loan Approvals

In the mortgage loan process, buyers will hear “approval” thrown around a lot. But not all approvals are built equally, and each type signifies a different part of the process.

Prequalification

Getting prequalified is often an early step for buyers in the home search. It’s quick, can be done online, and doesn’t require a hard credit inquiry.

To get prequalified, buyers provide financial details, including income, debt, and assets, but no documentation, so this step serves as an estimate of how much home they can afford.

Prequalification can help buyers create a realistic budget, but the amount, interest rate, and loan program might change as the lender gets more information.

Preapproval

Preapproval is slightly more complicated, requiring a hard credit inquiry and documentation from the buyer. Lenders may ask for the following:

•   Identification

•   Recent pay stubs

•   W-2 statements

•   Tax returns

•   Activity from checking, savings, and investment accounts

•   Residential history

Armed with this information, a lender will give buyers a specific amount they’ll likely qualify for.

Preapproval also shows sellers that a buyer is serious about a home, as it means a lender is willing to approve them for a mortgage.

Conditional vs Final Commitment

Prequalification and preapproval can be important steps during the home search. But especially in a seller’s market and in certain cities, the mortgage commitment letter can become an important tool.

While a mortgage loan commitment letter can show a seller that the buyer is serious, not all letters are the same.

A conditional mortgage approval letter, the most common type, means that the lender will approve buyers as long as they meet certain conditions.

Conditions could include:

•   No change to the buyer’s finances before the closing date

•   Proof of funds to cover the down payment and closing costs

•   Passing of a home inspection

•   An appraisal

•   Proof of homeowners insurance

•   No liens or other problems with the property title

A final commitment letter means the lender has unconditionally approved the buyer for a loan to purchase a home. However, this doesn’t mean the buyer is guaranteed a loan; it just means the lender is ready to approve the mortgage.

Having a mortgage commitment letter in hand is a good way to ensure that nothing will go wrong during underwriting.

Recommended: See Local Housing Market Trends by City

How to Know If You Need a Mortgage Commitment Letter

Buyers don’t need to provide a mortgage commitment letter to a seller. Still, that extra step beyond preapproval indicates how serious they are about a property.

Since it may require a little extra work, it shows sellers that a buyer is less likely to back out, especially due to financing issues.

A mortgage commitment letter could convince a seller to take a buyer more seriously in a seller’s market. And it could calm the nerves of buyers who face home-buying angst, including the challenge of covering a down payment and closing costs (even if they plan to roll closing costs into the loan).

How to Get a Mortgage Commitment Letter

Getting a mortgage commitment letter might sound like a hassle during an already stressful home-buying process, but doing so could save buyers time and provide a sense of relief as they creep closer to closing.

First off, buyers will need to be preapproved. If they have chosen a home, once under contract, their lender or underwriter will want more information, which may include:

•   A gift letter if another party is helping with the down payment

•   Employment verification

•   Explanation of any late payments

•   Proof of debts paid and settled

From there, it could be a back-and-forth between the lender and buyer, with the lender asking for clarification or additional documentation. Common issues that arise include:

•   Tax returns with errors or inconsistencies

•   Unexplained deposits into buyer bank accounts

•   Multiple late payments or collections on a credit report

•   Unclear pay stubs

At this point, the lender may grant a conditional commitment letter, with the caveat of additional information and an appraisal. If the buyer has an appraisal and meets lender expectations with documentation, they’re likely to get a final commitment.

Contents of a Commitment Letter

A commitment letter will vary from lender to lender but generally include the following details:

•   Loan amount

•   Loan number

•   What the loan is for

•   Mortgage loan term

•   Type of loan

•   Lender information

•   Expiration date of the commitment letter

What happens after the commitment letter? The lender and underwriter will continue to iron out the mortgage details, aiming for cleared-to-close status before the closing date on the property.

The Takeaway

A mortgage commitment letter is like a short engagement before the wedding: It signals an agreement before the real deal. Buyers in an active seller’s market might find a mortgage commitment letter advantageous.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

How long does it take to get a mortgage commitment letter?

It typically takes 20 to 45 days to get a mortgage commitment letter. The average closing process takes 50 days.

Does a mortgage commitment letter expire?

Yes.

How long is a mortgage commitment letter valid?

Timing can vary by lender, but the length of commitment is typically 30 days.

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Photo credit: iStock/MartinPrescott

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOHL-Q224-1917095-V1

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